If you’re an entrepreneur, freelancer, or business owner, you know that sometimes income can be a little crazy. You’re not getting the same paycheck sent to you every month — some months you might do a ton of business and generate a lot of income, but other months you might get nothing.
So how do you balance that? How do you keep some stability in your own life when you have this unsteady income?
Well, I am going to explain to you just how you can do that. You may not be getting a paycheck every month right now, but there’s nothing holding you back from doing exactly that. The goal here is to take a look at your income as a whole — not just the month to month variations — and give yourself a steady salary.
Before I really get into this, I want you to recognize that as a business owner or freelancer, you need to have systems and processes in place and you need to follow them. Here’s what I want you to do.
First, I want you to annualize your expected income and expected expenses. Try to estimate how much income you or your company is going to generate over the course of a year. So, as an example, let’s say you believe you can bring in $100,000 this year. I want you to set your budget to be between 70 and 80 percent of that. Build your budget around $70-$80,000.
Then, I want you to set up two separate checking accounts. One is your business operating account, and the other is your personal checking account. You should be taking all of the income from your business, or your freelancing, and putting it into that business operating account.
Once you’ve got that set up, the next step is to go ahead and create a salary for yourself. Remember when you added up your expected expenses for the year? Take that number, divide it by 12, and that is your monthly salary. Every month, send that money over to your personal account for living expenses and your general day-to-day use. This can and should be automated.
Time for some math — it’s simple, I swear. Let’s stay with our example from above.
$72,000 ÷ 12 months = $6,000/month (this is your monthly “paycheck”)
So in this case, every month you’ll be moving $6,000 from your business account to your personal account. Easy, right?
Now, I would recommend doing this through a payroll service, so they can withhold taxes for you. As a freelancer or entrepreneur, you are responsible for your own taxes and if you’re not saving money for taxes you’re going to have a rough time come April. Get a payroll service to take care of this for you — they’ll take out the correct amount of money each month from your “paycheck” and keep it in that business account. Come April, you’ll get hit with those taxes — but you already have all the money ready to go in your business account. It’s like nothing ever happened.
So, by doing this you have created a steady, level income for yourself. Even if you generate $20,000 of income one month and zero dollars the next month, it doesn’t matter. You’ll have the same amount coming to your personal account regardless.
The next step is to take a look at this business account every quarter, every six months, every year — whatever you feel is appropriate — and give yourself a bonus. So, going back to our example… If you actually made $100,000, you followed your budget properly, and you had a payroll service withhold taxes from your paychecks — you should have $28,000 left over in your business account.
That is your money. Give yourself a bonus if you want, or save it. Or do something else with it — it’s yours! If money is a little tighter than anticipated, just forget the bonus and keep on truckin’. But if you follow this practice, you’re not going to be stressed out about money every month.
I have a personal example for this. I own several companies, so I have various levels of income coming in at different times. I pay myself a salary that is enough for me to live the lifestyle that I want to live. Then, every quarter I will look at the income statements for my various businesses and I will assess.
I will look into which company has a surplus of income, which one isn’t doing quite as well as anticipated, etc. And once I’ve gone through that there are basically three courses of action I might take. I can do none of them or I could do all of them — it ultimately depends on the numbers and what my current goals are.
1) I’ll give myself a bonus. I deserve it, right?
2) I can shift some income from one company to another, if necessary.
3) I can use some of that excess money to pursue an investment opportunity.
Right now, I am actually looking to buy another business. I’ll need some cash on hand to do that, so I’ve taken some excess income from a few of those companies and I am keeping it on hand for when I end up making that purchase.
What all of this comes down to is that you should be treating yourself like a business. You should have reports, income statements, processes — all of it. Get this stuff set up. And it’s not very hard, by the way — you can do most of this in a simple Excel spreadsheet.
By using this method, you’re able to make better business decisions, you can budget your money properly, and you’re putting yourself in a position to act like a business owner. When you act like a business owner, you make better business choices. Ultimately, that is how you grow your wealth.
If you want to have financial freedom, treat yourself like a business.
Use your businesses. Use your income. Create stability, and that stability will lead to opportunity.